Reflections on GardenWorld Politics

813. The London riots and the underlying lack of opportunity.

There are several important articles that reflect on the London riots and the deeper causes. Basically that the shift of wealth plus the cutting of services creates a revolutionary underclass, like it or not. Much of the commentary has been about the thugs and the mindlessness of the rioters. But this is obviously a lack of compassion and a lack of systems understanding, or perhaps just a defense of the establishment because anything else seems inconceivable This from Peter Arps, Reuters. I quoted extensively. Because of the importance of the article.

Analysis: Riots shake faith in UK austerity, stability

In the eyes of the financial markets, Britain was supposed to be a model of successful, sustainable austerity and a safe haven in which the world’s rich could buy houses and stash their savings.

The riots that turned London and some other English cities upside down this week have undermined that model, raising questions about the sustainability of spending cuts and a widening gap between rich and poor.

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Order was restored in the capital at least on Tuesday night with a massive show of force by police, but they too face the drastic spending cuts that will affect everything from the military to social benefits and inner-city services

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Investors have always had mixed feelings about austerity. They want the British government to tackle the huge deficit to slow its accumulation of debt. But they also fear that cuts will push the economy back into recession, hitting corporate earnings and tax income while raising social spending costs and actually pushing the country deeper into debt.

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Indeed, the cost of insuring Britain’s debt in the credit default swaps market edged below that of Germany this week for the first time —

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Who buys those credit default swaps. Is it not just sheer speculation. Some broker sells me an insurance policy which says that if Germany defaults, I get a certain amount of money but if Germany does not fault I lose my insurance policy. Since the payout is likely to be large in proportion to the sea. I paid this is a risk worth taking. If I win I win big. If I lose lose little. Meanwhile, the broker who sold me the insurance policy loses a lot but he’s made a lot by selling a lot of insurance on a lot of contrived, bets like this. The result is a lot of money is at play that refers to no underlying assets. If I get this wrong please e-mail me

Spending cuts were now hitting the poorest hardest, they said, and after tales of politicians claiming excessive expenses, alleged police corruption and bankers getting rich it was their turn to take what they wanted .

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"They set the example," said one youth after riots in the London district of Hackney. "It’s time to loot."

Really pay attention to the fact that these are disadvantaged youths who are accused of having no education and no motive other than just letting off steam. There are many good reasons to not undervalue these kids..

"The most likely path from here is for no changes being made and moving into inflating the debt away — unfortunately" said Steen Jakobsen, chief economist at Saxo Bank.

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However, he warned that this alone would not restore social or financial stability without more fundamental systemic change. "For a society to grow and move forward all social classes need to benefit from growth," he said.

The Chinese artist, AiWeiWeigives an interview. The language is extraordinary as an affirmation of faith – in science plus democracy as the basis for the future.

Reading Between the Lines of Ai Weiwei’s First Post-Release Interview With Chinese State Media

"I’ve been drawn into the vortex of politics," Ai told the Global Times. "I will never avoid politics, none of us can. We live in a politicized society." Echoing a philosophy that he outlined on his iconic blog (published in book form by MIT Press), Ai argues that to be unengaged is to give up hope: "You give up your rights when you dodge them. Of course you might live an easier life if you abandon some rights. But there are so many injustices, and limited educational resources. They all diminish happiness. I will never stop fighting injustice."

Ai is quoted as saying. "The most important thing is a scientific and democratic political system." Calling for democracy, of course, is dicey — but China’s number one political crime is attempting to overthrow the government, which the Global Times articles goes out of its way to state that Ai is not doing.

The analysis of the US political system and it’s immediate situation keeps surfacing perspectives that require some careful thinking

Republicans must all be sitting in their back rooms and just cackling like hell right now. Think about it. They developed a strategy to hamstring the president completely — a strategy that’s bulletproof thanks to our country’s Constitution — knowing that it would rally their base but also hoping that it would cause moderates and lefties alike to become disgusted with Obama’s weakness even though we all know who’s really responsible for what’s going on. And it worked! In fact, it’s worked better than they could possibly have imagined.

The implication is that Obama had no choice. One possibility is that he has actually played this to win and will and that seems quite likely. But the most likely in my mind is that he played week out of lack of conviction and while he will win the election the world and the US lose the peace so to speak.yet Kevin’s argument should make us ask for real clarity about causes and effects.

Now comes what I consider to be a very important article, on the blog at the Harvard business review extremely clear and perceptiveUMAIR HAQUEwrites , and I quote extensively and ask you to please read the original article.

over the last several years or so, gradually, almost imperceptibly at first, the tenor of my city has changed. The convulsions of violence that have wracked London and other British cities seem to have exploded overnight, but I’d bet those of us living here know: that fuse has been long burning.

There are many kinds of looting. There’s looting your local superstore — and then there’s, as Nobel Laureates Akerlof and Romer discussed in a paper now famous among geeks, there’s looting a bank, a financial system, a corporation…or an entire economy. (Their paper might be crudely summed up in the pithy line: "The best way to rob a bank is to own one.")

The bedrock of an enlightened social contract is, crudely, that rent-seeking is punished, and creating enduring, lasting, shared wealth is rewarded and that those who seek to profit by extraction are chastened rather than lauded.Today’s world of bailouts, golden parachutes, sky-high financial-sector salaries — while middle incomes stagnate — seems to be exactly the reverse. Perhaps, then, our societies have reached a natural turning point of built-in self-limitation; and this self-limitation is causing a perfect storm to converge.

An enlightened social contract is not built on subsidies or "handouts" — whether to the impoverished, or to the pitiable welfare junkies formerly known as "the markets." It’s built on a calculus of harm and benefit not just accepted by a plurality of its citizens (versus a tiny Chalet-owning, caviar-gobbling minority at the top) — and also a calculus that can be said to meaningful in the sense that it results in real human prosperity. Without such a bargain to set incentives and coordinate economic activity, even the mightiest, proudest societies will find themselves as bent old men on an endless plateau, searching for a lick of shelter as the typhoon bears down.

f that’s the thunder and lightning, then here’s what’s going on behind the clouds. The eye of this perfect storm is extreme income inequality that makes the Glided Age look Leninist: London’s the most unequal city in the developed world. It’s a place where seeing dozens of supercars in a row makes tourists gawp, but rarely causes residents to raise an eyebrow; where oligarchs, tycoons, and oil sheiks are whisked around by Rolls-Royces the sizes of small yachts from shadowy members’ club to rarefied boardroom — a haven, not by accident, but by careful design, for the very richest of the world’s rich. But it’s also a city where threadbare ends are more and more difficult to make meet. It’s a poster child for the perverse dynamics of a Great Stagnation: a few super-rich get super-richer while incomes stagnate and decline for the vast majority of the "rest." And when the rule of law is visibly, easily flouted by the rich, it usually ends up being seen as laughable by the poor.

London’s become a city where many young people feel they’re finished before they start.Global economic imbalances (think, crudely, a country with a perpetual trade deficit) ultimately mean that there aren’t enough jobs to go around — and entrepreneurship is about as British as fish and chips are American. Being lucky enough to land a job that propels you into the ranks of the upwardly mobile — or at least, that keeps you from the ranks of downwardly mobile — depends, in my experience, not just on having gone to a handful of top schools (Oxford, Cambridge, LSE), but on having the right accent, postcode, and background. And while Americans might say that’s unique to Britain, I wonder if in most advanced economies, similar dynamics aren’t at work. Top employers, for example, don’t exactly recruit heavily from The University of Nowhere. Internships are heavily tilted towards the already-privileged. In fact, the problems of youth unemployment, underemployment, marginalization, and inequality are so pervasive globally, more and more economists are beginning to point to a lost generation.

Another storm cloud looming over the dreary isle is, of course, the grim specter of austerity. Of all advanced economies, the UK proudly passed perhaps the world’s most severe shock and awe austerity package — dramatic cuts across the board — to the shock and disbelief of many economists, who predicted that it would throw thousands out of work and cripple demand in the middle of an already precarious economic situation at precisely the time the economy needed it least. The result has been predictable: even for a world beset by reluctant recoveries, the UK’s "recovery" has been notably the poorest. Hence, an economy where too many are out of breath, struggling even to tread water. The evidence suggests austerity leads to social instability and violence: uh-oh. ….

Yet, the underlying ruptures might be said to be similar: What happens when a nation willfully ignores perhaps the most fundamental lesson of economics, and hopes rent-seeking will equal real prosperity? This does. What happens when a nation either loses, or prevents, a stabilizing middle class? This does. What happens when a government — any government — gets so out of touch with the governed? This does.

Our institutions are failing — they’re failing us; failing the challenge of igniting real, lasting human prosperity. If institutions are just instruments to fulfill social contracts, then ours are shattering because the social contracts at their hearts have fractured.

(abstract)Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go handin hand with politically motivated violence and social instability. In this paper, we assemble crosscountry evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with moreconstraints on the executive are less likely to see unrest as a result of austerity measures. Growing media penetration does not lead to a strongereffect of cut-backs on the level of unrest.

A clear article about Greenspan and the use of cheap money. Unmentioned is the probabale attempt to keep Bush in the presidency.

“This entire crisis traces itself back in large part to then FOMC chair Alan Greenspan not allowing markets and the economy to flush themselves clean after the dot com collapse. It seems that nearly every Fed/Government policy action has been a response to the problems that error led to.”

It wasn’t long after that when traders deduced that the Greenspan was their bitch. It soon became apparent that at the first sign of trouble, the Fed stood ready to flood the system with liquidity. In just 4 short years, markets saw the Fed respond massively to the Asian Contagion (1997), Russian bond default, Long Term Capital Management Collapse (1998), Y2K bug (1999), Dot Com implosion (2000), 9/11 (2001).

There was no small irony in that Greenspan, Mr. Free Market himself, had become Mr. Centrally Planned Economy. This was not lost on the Wall Street community, whose jobs were to figure our where the best and most lucrative opportunity lay. Liquidity driven asset prices was the answer to that question.

Following the Y2K cash infusion on October 22, 1999, the Nasdaq doubled from 2500 to 5100 over the next 6 months. The 78% collapse it suffered overstates what should have been a more typical 50% crash (lets call it 2500 down to 1250) had the Fed intervention not occurred.

With the Fed Funds rate at 6% in late 2000, the Fed began slashing rates in January 2001. They made 8 rate moves between January and August 2001, cutting rates in half to 3%. Note this was all prior to 9/11. I believe Greenspan panicked, taking rates all the way down to 1.25% following the attacks.

At the time, it was unprecedented to have rates below 2% for three years, and at 1% for a year.

There is a reason I noted How easy money corrupted Wall Street and shook the world economy — it was a prime spark to the conflagration. Had we had a more normalized Fed policy, much of what took place in the 2000s very well would have gone down quite differently. We would likely have had a deeper, more painful recession, but we would have been on the path to recovery today.

The current crisis is revealing things about the underlying structures that were quite denied and not discussable. The current writings are much better but it remains to be seen what impact they will have. Taken altogether the articles in this post post tell a remarkable story.